18/08/2008

If you have entered into an agreement with another person you may be unaware that you and the other party have a duty to carry out and fulfil each of your obligations under the agreement in good faith.

What is an obligation of good faith?

The law requires each party to do all things that are necessary to enable the other to achieve their objectives under a contract and obtain any benefits that the contract may provide.

This issue can particularly arise in ongoing supply and service agreements, in situations where:

1.     Party A contracts with party B to provide it with an ongoing supply of a particular product or service.

2.     Party A then conducts itself in a manner so that party B incurs substantial extra costs in providing its goods or service to Party A.

3.     Party B’s profits are reduced if it continues to provide its product or service to Party A.

4.     As a result, Party B decides to cease providing its product or service to party A, and wants cooperation from Party A.

If Party A’s actions are found to have prevented Party B from carrying out its obligations or achieving its financial benefits contemplated under the contract, Party A may be found to have breached its good faith obligations and could be sued by party B for its losses.

Generally when carrying out its obligations under a contract, each party will attempt to maintain and enhance their commercial position. This is fine as long as it is not done to the detriment of the other party.

There may be a fine line to tread but nonetheless consideration of this issue when carrying out your obligations under any type of agreement could save you a lot of time, stress and money, if the
other party subsequently alleges that you breached your good faith obligations by conducting yourself in a manner that placed them in a position in which they could no longer fulfil their obligations under the contract.

As is always the case in a business transaction, never assume!   Rather, consider all issues and get advice if you need it.  For help on any business issue you may be facing, please pop in to meet with us or call 8296 6222